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Jane D’Arista: Banks’ wild speculation led to the crash – it’s happening again

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. We’re in Hadlyme, Connecticut, with Jane D’Arista, and we’re talking about banks gone wild. Thanks for joining us again, Jane.


JAY: So in the first segment of the interview, we kind of talked about the dynamic of this bank Ponzi scheme, which from the outside seems, oh, so complicated, but once you actually start to understand how vulgar it is, it starts to sound like an American kleptocracy. It’s not that much different than the kind of straightforward stealing that goes on in under-developed countries, in fact maybe worse.

D’ARISTA: Yeah, very much so. I think, you know, that there’s another thing to come into this, and that is the change in the structure of US finance. And we call it securitization. And it is a phenomenon where a bank makes a loan and sells it to an investment bank, who then pools it with other loans and sells the shares in that pool of loans to your pension fund, your mutual fund, etc., and the insurance company that has the insurance on your car, your mortgage, etc. Securitization pushed a kind of asset, asset-backed securities, mortgages, as well as car loans, credit card receivables, etc., all across the financial sector. Everybody was pooled together in these asset pools.

JAY: And globally everybody’s getting in on it.

D’ARISTA: And globally. Exactly. So how did this come about? Well, we used to have a system, coming out of the Depression, of regulation, good regulation. One of the factors there was that there was a ceiling on deposits, in other words what a bank could pay in order to—to the depositor. And this kept interest rates reasonable, and it kept stability in the system. It protected the household sector and the business sector from volatile rates, from sharp rises, increases in rates, etc. Along comes the external market, the euro markets, with the American banks overseas dealing in dollars offshore. They didn’t have any restrictions like that. They could charge whatever interest rate they wanted. And at a given point, when the Fed was trying to cool the economy, they brought all this money into the country.

JAY: What period are we talking about?

D’ARISTA: This would be the end of the ’70s. And that caused the havoc that ended in the dollar then floating.

JAY: This is when interest rates are in double digits.

D’ARISTA: No. That was at the—. I’m sorry. The original thing with the money coming in and the euro market was at the end of the ’60s. End of the ’70s, then interest rates go sky high. You’ve got all of this interaction between national markets and external markets, money flowing back and forth here. Central banks can’t keep control over the interest rates. So in 1980, legislation came along that said: ending the ceilings. This meant that banks and thrifts (what we called the savings institutions that made the mortgages) couldn’t do it anymore. If you don’t have that ceiling, how can you lend for 30 years? I mean, you’ve got a loan that is for 5 percent for 30 years. You’re attracting funds that you’ve got to pay 10 percent. The thrifts, as we recall, in the ’80s were going bust, hand over fist. So then you have the situation in which securitization comes in. The idea: well, we’ll make the loans, ’cause we’re good at that, and we’ll sell them. And then we won’t hold them in the books; we’ll sell them to people who can—insurance companies, pension funds, etc., that can hold these long-term things.

JAY: Well, they argue, well, what’s wrong with spreading out the risk?

D’ARISTA: You created, then, a market that shifted from a bank-based market to a market-based market, and there are different rules. In a bank-based market, what you have on your balance sheet, you don’t have to mark it to market. If you’re holding tradable instruments, which is what securitization is all about, liquidity, yeah, I’m holding a [inaudible] but I can sell it, right? So, you know, I’m not holding it for 30 years. The only problem is if the price goes down you have to mark it to market. And that’s where you got into this whole regime of the capital of the institutions all across the system absolutely evaporating.

JAY: So, in simplest terms, they play this casino speculative game. Individually the people playing it are getting fabulously wealthy. They know someday it’s going to crash, and après moi, le déluge. But then there’s no consequences, because in the final analysis the government comes in and says, oh, don’t worry, you’re far too important to the economy to fail, so we’re going to make sure that [inaudible] insurance through AIG. We’ll make sure AIG has the money to pay you off. And, you know, no truth, no consequences. And here we are, and is it still not just all happening again? Like, have we learned anything? Has anything changed? Or are we just heading—as you said before, is it all going to happen again?

D’ARISTA: It is happening again, and there are a number of people now out there writing about the fact that we have the [inaudible] going on again. Now they’re funding in US dollars, ’cause the dollar is—the interest rate is so low. And they are sending money to emerging market countries, and to some extent to Europe as well, which has a slightly higher interest rate than we do. So it’s back, and they’re all back in business. When these institutions like Goldman Sachs say that they have made all these profits, it’s on proprietary trading. Did it do anything for the economy? No. I mean, do we have credit going out there? Everybody will agree, including [Ben] Bernanke, the banks are not lending to households and businesses. The banks will say, “Well, you know, they’re not creditworthy.” We’re not creditworthy. We are up to our ears in debt, in the aggregate, the American household. Businesses are not doing all that well, either, so, you know, there is a problem for them as well. And the banks are saying, “But look how we’ve stabilized the system, ’cause we’re making profits, and now we pay our bonuses again.”

JAY: With this globalization of the world economy, there is two games going on. One is you can play workers’ wages here against worker wages there, ’cause it’s so easy to move production from here to there now in most industries.

D’ARISTA: That’s right.

JAY: Which drives wages down everywhere.

D’ARISTA: Everywhere.

JAY: And now you can play economies against each other. We’ll play, “Well, that one’s in recession, so we’re going to go there and borrow the money. And this one is trying to attract capital, so we’ll go over and buy here where they’re going to pay higher interest rates.” And they get to [play] recessions off against each other.

D’ARISTA: That is true as well.

JAY: So what do we do?

D’ARISTA: Well, you know, we have to go back to our regulatory system and we have to stop the game. And there are ways of stopping it. First we need to go back and do some of those regulatory things that we got rid of under Reagan and Thatcher when the mantra was free markets and look at what we call quantitative controls.

JAY: Okay. Let’s do that in the next segment. So next segment of our interview we’ll talk about what we can do about the global kleptocracy. Please join us for the next segment of our interview with Jane D’Arista.

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Jane D'Arista is a research associate with the Political Economy Research Institute (PERI), University of Massachusetts, Amherst where she also co-founded an Economists' Committee for Financial Reform called SAFER (Stable, Accountable, Efficient & Fair Reform) and gave testimony to Congress on financial reform. Jane served as a staff economist for the Banking and Commerce Committees of the U.S. House of Representatives, as a principal analyst in the international division of the Congressional Budget Office. Representing Americans for Financial Reform, Jane has currently given Congressional testimony at financial services hearings. Jane has lectured at the Boston University School of Law, the University of Massachusetts at Amherst, the University of Utah and the New School University and writes and lectures internationally. Her publications include The Evolution of U.S. Finance, a two-volume history of U.S. monetary policy and financial regulation.